Why I Discourage Financing With FHA

FHA financing is an interesting thing. On one hand, it opens up the housing market and bigger, better homes to those who might not have been able to buy something otherwise. Buyers who choose to utilize the opportunity to invest with low down payments don’t have to come up with as much cash, and those that stretch the debt-to-income ratio on these loans have a little bit more flexibility than they would with conventional loans.That said, I typically recommend against using FHA financing. Here’s why.

Lifetime PMI Costs

PMI (private mortgage insurance) is the major problem that presents itself to those who use FHA financing. Since FHA loans are viewed as a little bit more risky and uncertain, PMI costs are added to every monthly payment that homeowners utilizing this kind of financing make.

The worst thing about PMI is that the cost associated with it typically doesn’t go away until you’ve paid off almost the entirety of your mortgage. Not to mention, this service comes at a premium - the impact it has on a given monthly payment is significant. Since PMI has such a significant impact on a monthly mortgage payment, it often becomes necessary to refinance. And while no one knows for certain, my expectation is that we’ll be seeing interest rates climbing more and more - making options limited for those stuck with FHA financing.

Limited Competitive Ability

Another problem with utilizing FHA financing is that you, as a buyer, are unlikely to have the winning bid in the case that a home has multiple offers. The fact is that accepting an FHA-financed offer is intimidating - with the rigorous inspections and special terms that come along with these offers, there’s high potential that a deal could fall through.

As a buyer, it’s important to be aware of this so that you can have a realistic idea of what you can get with an FHA-backed offering.

Fewer Properties to Consider

Another major issue with utilizing FHA financing is that, to you, the market shrinks down. Homes that don’t meet FHA standards aren’t even worth looking at because they’ll definitely fail the inspection and be un-purchasable in your situation.

In some ways, it’s nice to know that you’re protected from making a poor investment. However, in some cases, the standard set forth is much higher than the standard you might be looking for. There are certain occasions where an FHA inspection may prevent you from buying a property that’s in good shape just because of one or two quirks that don’t align how they’re supposed to.

This tends to become an issue when considering historic homes and is less of an issue when the properties in consideration are newer.

Conclusion

No one’s scenario is exactly the same, so it’s possible that FHA really could be the best option for you. That said, it’s better to be aware of the shortfalls than to be caught off guard by them. If you’re trying to figure out what kind of loan would serve you best, I’d love to sit down with you for a consultation. I’d be happy to point you towards my top choice for a mortgage lender in the Twin Cities as well.